Soft Brexit may be 'blessing in disguise' to halt overheating risk

How Irish policymakers manage the fall-out from Brexit – regardless of the form it takes – will be important for assessing Irish credit fundamentals into the future, according to Canadian credit rating agency DBRS.

How effectively authorities use fiscal and macro-prudential policy tools to manage the eventual Brexit outcome are an important test in terms of the ability to manage the economy over time.

For now, the negative impacts of Brexit here have been hard to see and may even be helping cool an otherwise overheating economy, according to DBRS.

The UK economy has already slowed dramatically and last year it grew at 1.4pc, the weakest rate since 2012, with some economists citing the impact of Brexit uncertainty on investment.

But in Ireland, exports are booming, companies have relocated and created 4,500 jobs here, helping the economy to grow around 5.6pc last year. Booming company tax receipts have also pushed the budget into surplus.

“Despite the benefits to the Irish economy since the referendum, including many companies shifting resources from the UK to Ireland, the threat of a no-deal Brexit may in part be starting to apply some convenient friction to the Irish economy,” DBRS said in a report on the Irish economy.

“Concerns of economic overheating, given the supply constraints in labour and real-estate markets, could be exacerbated over the medium-term if the Brexit-related uncertainty that has loomed over Ireland were to evaporate following a benign outcome,” it noted.

For most European economies, Brexit will have a limited impact, but comes at a time when activity is already slowing quickly.

But for the economy here, the impact of Brexit, especially a cliff-edge no-deal, could be worse than in the UK.

Read more: EU ‘should hand back Irish taxes in no-deal UK divorce’

There is a wide range of estimates for the impact here, from a hit of 4pc lopped off potential economic growth over the long-term to a loss of as much as 8pc versus a situation where the UK had remained in the EU.

Ireland’s recovery from the financial crash – based on the headline economic numbers alone – has been spectacular.

According to DBRS, real modified domestic demand, which strips out external distortions, has grown at an annual average rate of 4.6pc from 2014 to the third quarter of 2018, while employment growth has increased at an annual average pace of 3.3pc over the same period.

While the poorest 10pc in terms of income do relatively well when compared with advanced European Union peers, where there are relatively equal income distributions, the next poorest 40pc do badly, according to Robert Sweeney, a policy analyst at TASC, an independent think-tank here.

Elsewhere, Davy Stockbrokers cut its outlook for UK economic growth to 1.0pc this year from 1.8pc previously.

The move from Davy came after the Bank of England last week cut its 2019 growth forecast for the UK to just 1.2pc.

Read more: Lane gets nod for ECB post

“Brexit, tighter financial conditions and political uncertainties are now weighing on UK GDP growth,” Davy said.

“We expect a ‘soft patch’ in the first half of 2019 so that GDP growth slows to 0.1-0.2pc per quarter. On Brexit, we expect the status quo to be maintained via a deal or an extension of Article 50.

“We forecast 1.4pc GDP growth in 2020, with activity still held back by weak investment and productivity growth.”

Amid continuing uncertainty, ING Bank said that in a no-deal scenario it expects a sharp move lower for sterling, with euro/pound above 0.95, and even testing parity in case of a crash. The pound/dollar could drop to the 1.10-1.20 area, the investment bank said.

Central Bank governor Philip Lane has been formally nominated by eurozone finance ministers to be the next ECB chief economist.

His appointment is due to be confirmed at an EU summit in March.

His impending elevation comes with current ECB chief economist Peter Praet due to leave at the end of May.

Prof Lane, the only candidate put forward to replace Mr Praet, will have an important role in managing the sluggish eurozone economy when he takes up his new job.

Prof Lane’s departure will create a race to replace him at the Central Bank.

Deputy governor Sharon Donnery and Department of Public Expenditure and Reform secretary general Robert Watt, who was pipped by Prof Lane to the post the last time out, could be among the contenders to replace him.